Why creating ERC20 tokens instead of using ETH?

Question

I have made an online web app which executes a process only if a transaction on the Ethereum blockchain is made. As I was developing my initial thought was to create an ERC20 token so that whoever has it can access the app and perform the "process" which I designed it for. However after a while I realized: why do I even need an ERC20 token in the first place. Could I just say that if a certain amount of ETH is transferred to my walled the, process is executed?

So here is my question: why do people tend to create ERC20 tokens to make transactions for their applications while they could just transfer ETH in the first place?

Answer 1

When you create your currency (ERC20), you create a whole economy around it. The supply, inflation, price, etc. That gives you the flexibility to create your economy for your app. Plus, you may allocate some portion of the supply for the developer team, the community who supports and helps the app, etc. Having your currency is not necessary but gives you strong tools.

You can make transactions with ETH, accept payments, etc. You don't need a token (ERC20) to create an app. You can use ETH in your app.

It is all about your business model. How the app will survive?

1. You may have ads to generate revenue
2. You may have a commission on transfers with ETH, no ERC20 is required.
3. You may have no ads and no commission. All services would be free if you have an ERC20 token to generate revenue by allocating some of the token supply for the app development.

The first option is the current business model of our world, which is terrible. Makes us the real product. The second option can be ideal depending on your app. The last option can be the best if the tokenomics is fair and well designed.

There are many things that an ERC20 token brings to an app. I can't list all of them. Last but not least, you can create a DAO to manage the app with the community.

You may use a discord server or a poll service to do that, but they can be manipulated. On the other hand, token-based governance creates capital-centric governance which is not a perfect solution. But you can create a non-transferable ERC20 token separately to handle governance more fairly.

I hope this answer helps a bit to understand the use case of ERC20 tokens.

Answer 2

ETH is the native currency on the Ethereum blockchain and its primary use case is paying transaction fees, as well as an incentive for miners/validators who keep the network secure. Its value against other currencies fluctuates rapidly, and its programming features are kind of limited compared to ERC20 tokens.
On the other hand, however, we have ERC20 tokens that can be used to settle real-world value on the blockchain in a decentralized and secure manner. Stablecoins can map USD or other real currencies' value for example (though using different strategies), or as another example, we have PAXG which is backed by physical gold. Many ERC20 tokens are utility tokens that are designed for a specific purpose. AAVE token, for example, is governance and staking token for AAVE protocol.
ERC20 itself is a template for any smart contract that can offer some amazing programmable features (such as automatically transferring it under pre-defined circumstances, granting or revoking spend permission to any arbitrary user or smart contract, using it as a means of payment, etc). You can do almost anything that is feasible in a computer program by using an ERC20 token.